The SEC Proposes Expanding the Pool of Smaller Reporting Companies

The SEC recently proposed greatly expanding the definition of “smaller reporting company” applicable to public companies that file reports under the Securities Exchange Act of 1934 (10-Ks, 10-Qs, etc.). As someone who has done most of my public company work for smaller reporting companies, I can confirm that this will be a huge regulatory relief for those companies who now fall under the definition.

For most companies, the current threshold for determining if a company is a smaller reporting company is whether the public float (market value of shares held by non-affiliates) is less than $75 million. The SEC proposes to increase this number to $250 million, which the SEC estimates would allow an additional 782 companies to be classified as smaller reporting companies. In addition to the companies that can newly claim this status, it will allow existing smaller reporting companies to retain that status for a longer time as they grow.

Smaller reporting companies have far less of a disclosure burden than their larger counterparts. The SEC release linked above contains a handy chart, starting on page 8, listing the “scaled disclosure accommodations,” i.e., items that smaller reporting companies either don’t have to include in their filings or items that require less disclosure. A non-exhaustive list of some of the more important ones:

Item 303 – two rather than three years of MD&A; no need for the contractual obligations chart.

Item 402 – probably the most significant one; fewer executives to be named, fewer years of compensation data, and several items not required at all, including compensation discussion and analysis, pay ratio disclosure and various tables.

Regulation S-X – only two years of historical financial statements required, rather than three.

Press Coverage

"Andrew Abramowitz, a lawyer in Manhattan who has worked with both buyers and sellers of private placements, said every investor should approach a private placement skeptically." -- Paul Sullivan (New York Times)

"If the goal [...] is to protect people from losing all of their money in an illiquid investment, the current standard fails on that count, too. Andrew Abramowitz, a lawyer in Manhattan who has worked with both buyers and sellers of private placements, said a better standard might be to limit how much of their net worth people can invest." -- Paul Sullivan (New York Times)